Accounting Interview Q&A 2
What are the effects on the balance sheet when a company borrows a two-year bank loan of $1,000?
$1,000 credit in non-current liabilities; $1,000 debit in current assets
What happens to the balance sheet when a company makes sales of $500, of which $300 is paid in cash and $200 is sold on credit?
$300 debit in cash; $200 debit in accounts receivable; $500 credit in retained earnings
What happens to the balance sheet when a company pays salaries of $5,000?
$5,000 credit in cash; $5,000 debit in retained earnings
The ending net book value of Property, Plant & Equipment (PP&E) in year 1 and year 2 are $500,000 and $430,000 respectively on Company A's balance sheet. The company's depreciation expense in year 2 is $90,000. What is Company A's net capital expenditure?
500,000 - 430,000 = 70,000 90,000 - 70,000 = 20,000
Company B purchased an equipment for $600. The equipment has a useful life of 4 years and a scrap value of $50 at the end of year 4. What is the depreciation expense for year 1 (using straight line method)?
600 - 50 = 550 550/4 = $137.50
How would an inventory write-down affect the three statements?
Balance Sheet = Assets and Equity are reduced Income Statement = Net income is reduced (Expense account) Cash Flow = CFO increases because its a non-cash expense.
Explain the difference between deferred revenue and AR.
AR = Money owed by customers for goods/services already provided. D/R = Money received from customers for goods/services not YET provided.
What is the formula to calculate operating cash flows with the indirect method of creating a cash flow statement?
Net income + Depreciation - Changes in working capital
Cash flow from operating activities
Net income + Non-cash Expenses + Changes in Working Capital
Net Profit (Net Income)
Gross Profit - (Total Operating Expenses + Interest + Taxes + Amortization + Depreciation)
What would increase goodwill?
If a company buys a business for more than the fair value of its tangible and intangible assets then goodwill is created.
When do you capitalize rather than expense a purchase?
If the purchase can be used in the business for more than a year, it can be capitalized and depreciated.
Net capital expenditure (net Capex) should be recorded in which section of a Cash Flow Statement?
Investing cash flow
Which of the following is true about the accrual concept?
It requires companies to recognize revenues and costs as the business incurs them
If cash isn't recorded as revenue, what happens to it?
It's classified as a liability (Deferred Revenue) if the revenue hasn't been earned yet.
Explain negative working capital.
Negative working capital occurs when inventory moves quicker than receiving funds. Typically this shows efficiency in businesses with low inventory and AR. But in other industries, negative working capital may signal a company is facing financial trouble.
Retained Earnings
Net Income - Dividends
In which sections of a Cash Flow Statement should net income and dividends be recorded?
Net Income - Operating Cash Flow Dividends - Financing Cash Flow
Which of the following is the correct formula to calculate operating income?
Operating income = Gross profit - Indirect operating cost
Give an example of a non-current asset.
Property, plant, and equipment
Which of the following best describes the Double Declining Balance depreciation method?
The depreciation expense is greater in the first few years and smaller in the later years
Company A used $3,000 worth of office supplies this year but the costs were not paid for until next year. Which of the following is not a result of this transaction?
There is a $3,000 credit in cash on the balance sheet
How do you record PPE (Property, Plant, Equipment)?
There's four areas to consider: initial purchase, depreciation, capex additions, and dispositions. (Bonus: re-evaluation)
Name three examples of common budgeting methods.
Zero based budgeting Incremental budgeting Value-based budgeting
